How to Calculate Property and Casualty Insurance Rates

Wouldn’t you like to know where your broker or agent get the rates they give you? It’s not what you think: they aren’t trying to rob you. There are legitimate mathematical techniques to analyze loss and other information used to determine insurance rates. You may be given a quote based on the pure premium method.

Instructions

Difficulty: Moderate

Things You’ll Need:

• Calculator

1. Calculate the pure premium. This is the amount your insurer needs to pay claims. Divide the dollar amount of incurred losses by the number of earned exposure units. This is the exposure unit that the insurance company provides a full year of coverage. For example, if you have a loss of $3 million and your exposure unit is $100,000 then your pure premium is $30.
2. Estimate the expenses per exposure unit. This amount is what the insurance company is required to pay for such as taxes/fees to the government and legal fees to defend a claim. It is based on prior experience. So if you have $1.8 million worth of expenses you divide that by $100,000 so your expense per exposure would be $18.
3. Determine the profit and contingency factor. Hey, insurance companies have to make money and unfortunately they pass this cost to you. However, it’s also there to protect the company against incorrect information that led them to give you an inaccurate quote. For example, fraudulently claiming that you live in a safer part of town for a cheaper rate. Not to worry, there are regulations that state how much they can charge you.
4. Calculate your rate. Your final rate is determined by adding your pure premium and expense per exposure unit and dividing it by 1 minus the profit and contingency factor. (30 + 18)/ (1- 0.03) is $ 49.50 when rounded.